Transcript Economic productivity and growth: Why do they matter?

EXPLORING
YOUR OPTIONS
ECONOMIC GROWTH AND
PRODUCTIVITY: WHY DO THEY
MATTER?
Dr Bryan Morgan
Before 10,000 years ago …
All our ancestors were
hunter-gatherers.
Palaeolithic technology:
Things are different today…
Modern technology
Another modern reality…
In 2011, just over one billion people lived on less than
$1.25 a day – World Bank
… compared with 1.91 billion in 1990.
The Big Question:
How did we get from here:
To here:
And why have a lot of people been left behind?
Palaeolithic era:
Production = Consumption
Modern era:
Production = Consumption + Saving
Saving  Investment & is used to increase
future production and increase knowledge.
Where it started:
Neolithic revolution:
Farming + domesticated animals
Suggested reading: Guns, Germs & Steel – Jared Diamond
Industrial Revolution – 18th & 19th centuries
Things really started moving
Some Economic Concepts
 GDP – Gross Domestic Product
 How much a country produces, also a measure of
income
 GDP per capita
 average output (or income) per person
 Inflation adjusted dollars
 Life expectancy
 average lifespan of a person born in that year
 low life expectancy is usually due to high infant
mortality
GAPMINDER - 1
GDP/capita vs Life Expectancy
www.bit.ly/1KWhNl8
How does per capita income increase?
Through increases in productivity.
Productivity = output per employed person
Increases in Productivity
 Technology
 Also division of labour & specialisation then trade
Skilled Workers + Better Equipment
= Higher Productivity
Improvements in productivity increase effective
number of workers
+

+
+
Two new effective
workers who need
equipment (i.e. capital)
12
GAPMINDER - 2
Productivity
www.bit.ly/1Jajl56
GAPMINDER - 3
Agriculture as % of GDP
www.bit.ly/1NZnGeT
The Importance of Growth Rates
An economy has a GDP of $100b at time t = 0.
After 50 years with an average growth rate of:
2% pa
GDP50 = $269b
3.5% pa
GDP50 = $558b
7% pa
GDP50 = $2946b
How do we increase productivity?
 Improved Technology  R & D
 More Physical Capital
 More Human Capital
Through INVESTMENT
INVESTMENT = SAVING
How much should we save?
Economic Models
Economists use models, simplified versions of
reality, to analyse problems, such as how much
should we save?
An early model in macroeconomics was used to try
to answer this question:
Solow Growth Model
The analysis can be graphical or, as is more
common, algebraic.
The Golden Rule capital stock
c* = f(k*)  (+n+g)k*
is biggest where the
slope of the production
function
equals
the slope of the
depreciation line:
f(k*)
(+n+g) k*
*
c gold
MPK = (+n+g)
MPK- = (n+g)
*
k gold
steady-state capital
per effective worker,
k*
The Golden Rule with technological progress
To find the Golden Rule capital stock,
express c* in terms of k*:
c*
=
y*

i*
= f (k* )  ( +n + g)k*
c* is maximized when
MPK =  + n + g
or equivalently,
MPK   = n + g
In the Golden
Rule steady state,
the marginal
product of capital
net of depreciation
equals the
pop. growth rate
plus the rate of tech
progress.
19
Examples of National Saving Rates
Country Name
1970
1990
2000
2005
2010
2012
World
24.9
29.5
22.2
21.6
19.7
21.8
Australia
32.6
26.7
24.0
24.9
26.9
28.3
Brazil
20.1
21.4
16.5
19.8
19.2
16.1
China
28.9
39.1
37.5
47.6
52.1
51.5
Germany
29.0
23.1
22.6
22.5
23.1
23.2
Greece
23.7
12.1
11.4
12.1
8.3
28.0
Indonesia
14.3
32.3
32.8
29.2
34.3
18.8
Japan
40.1
33.4
26.6
23.9
21.0
33.8
Korea, Rep.
15.2
36.4
33.4
32.4
32.1
37.6
Sweden
27.2
24.2
25.0
25.6
24.9
30.9
Thailand
21.2
33.8
31.5
30.3
33.4
15.0
UK
21.1
18.1
15.8
14.1
13.0
12.7
United States
18.4
16.3
16.7
14.2
11.3
15.7
Gross domestic
saving (% of GDP)
Gross domestic
saving are
calculated as GDP
less final
consumption
expenditure (total
consumption).
Source: World Bank
http://data.worldbank.org/
indicator/NY.GDS.TOTL.ZS
20
Growth isn’t everything…
How about the distribution of wealth?
Distribution of wealth with a country can be
measured by Gini coefficient
 Gini coeff = 1  complete inequality
 Gini coeff = 0  complete equality
Sth Africa
50
Thailand
Brazil
China
United States
United Kingdom
30
Egypt
Australia
Afghanistan
0
Germany
10
Sweden
20
Kenya
40
Gini Coeeficinet
Gini Coefficient for selected countries
70
60
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